Danske Bank A/S : NCR - Danske Hypotek AB publ cover pool overview H1 2021

ISSUER COMMENT

13 Sep. 2021

Danske Hypotek AB (publ) cover pool overview H1 2021

PRIMARY ANALYST

Sean Cotten [phone]

[e-mail]

SECONDARY ANALYST

Geir Kristiansen [phone]

[e-mail]

This commentary does not constitute a rating action.

Nordic Credit Rating's (NCR's) 'A' issuer rating and 'AAA' covered bond ratings on Danske Hypotek AB (publ)(Danske Hypotek) are unchanged following the publication of its mid-year 2021 results and receipt of updated cover pool details. The following is a bi-annual summary of the cover pool. Our latest full report explaining the components of the covered bond ratings (see Figure 1) is available here.

Figure 1. Danske Hypotek covered bond rating components

Issuer

Senior

Covered

National

Likelihood

Covered

A

A+

unsecured

+1

bond

+2

+1

of

AAA

bond

rating

framework

rating

hierarchy

resolution

rating

Figure 2. Danske Hypotek cover pool characteristics, Q2 2019-Q2 2021

	Q2 2019	Q4 2019	Q2 2020	Q4 2020	Q2 2021
Eligible cover pool assets (SEKm)	74.5	92.9	107.3	113.8	115.8
Outstanding covered bonds (SEKm)	63.5	73.1	89.5	90.9	104.9
Overcollateralisation (%)	17.3	27.0	19.8	25.2	10.4
Weighted-average LTV (%)	58.4	59.0	59.1	58.0	56.0
Average loan seasoning (years)	3.8	3.8	3.9	4.2	4.3
Average bond maturity (years)	3.7	3.3	3.2	2.8	2.6
Average loan size (SEKm)	1.07	1.06	1.04	1.04	1.05
Owner-occupied share (%)	95.8	96.2	96.3	96.4	96.0
Priority liens (%)	98.3	98.5	98.6	98.6	99.0
>60 day past due loans (bps)	0.00	0.00	0.00	0.00	0.00

Source: Danske Hypotek's European Covered Bond Council Harmonised Transparency Templates (ECBC HTT). LTV-loan to value.

Figure 3. Share of pool by borrower-level LTV, last five quarters

100%
90%
			31.6%	31.0%	26.4%	24.5%
80%		34.9%
70%
								21.0%	20.7%
60%
	20.0%			21.0%	20.7%
50%
								19.1%	19.3%
40%								17.8%
	16.5%			17.5%
30%
								16.1%	17.0%
		13.5%			14.2%	14.7%
20%
10%
15.1%			15.7%	15.7%	17.4%	18.6%
0%
	Q2 2020	Q3 2020		Q4 2020		Q1 2021		Q2 2021
				0-40%			40-50%		50-60%		60-70%		70-75%

Source: company. Entire eligible loan amount in respective bucket based on borrowers' LTV.

1/5

Figure 4. Loan balance by property region (SEKbn), 30 June 2021

4.80.3

0.3

Source: company.

Figure 6. Average loan per property by region (SEKm), 30 June 2021

1.4

2.1

1.6

Source: company.

Figure 5. Weighted LTV by borrower region (%), 30 June 2021

50.854.6

61.5

Source: company.

Figure 7. Average region class by property region, 30 June 2021. 1 - most liquid, 3-average, 5- least liquid.

3.0

2.6

3.5

Source: company.

2/5

Figure 8. Share of pool by loan seasoning, last five quarters	Figure 9. Share of pool by loan size (SEK), last five quarters
100%													100%
												4.5%	4.5%	4.3%	4.3%	4.2%
90%
	25.6%		27.0%	28.3%	29.0%	30.0%		95%
80%
												90%
70%
21.1%		22.2%									85%
60%			23.3%
		23.7%	23.6%		23.6%	23.6%	23.4%	23.6%	23.7%
					80%
50%
	17.7%		18.7%
40%			17.4%
			17.2%	15.9%		75%
30%
												70%
20.5%		17.8%	15.5%	14.8%	16.8%
20%
												65%		71.7%	71.8%	72.1%	71.9%	72.0%
10%
	15.1%		14.2%	15.5%	15.3%	13.7%
0%													60%
	Q2 2020	Q3 2020		Q4 2020		Q1 2021	Q2 2021		Q2 2020		Q3 2020		Q4 2020		Q1 2021	Q2 2021
		Up to 12months		12-24 months		24-36 months		36-60 months			>60 months	Source: company.		Up to 2m		2-5m		5-20m		>20m
		Source: company.

Figure 10. Share of pool by payment profile, last five quarters

100%
90%
80%
58.4%	57.3%	58.2%		58.2%
70%			60.0%
60%
50%
40%
30%
41.6%	42.7%	41.8%		41.8%
20%			40.0%
10%
0%
	Q2 2020		Q3 2020	Q4 2020	Q1 2021	Q2 2021
Source: ECBC HTT.		Bullet/interest only		Amortising

Figure 12. Share of pool by interest rate, last five quarters

100%
90%
80%
								55.2%
70%									60.8%
					67.5%
60%		79.4%	77.5%
50%
40%
30%
								44.8%
20%									39.2%
					32.5%
10%		20.6%	22.5%
0%
	Q2 2020	Q3 2020	Q4 2020	Q1 2021	Q2 2021
				Fixed rate, >1 year fixing			Floating rate, <1 year fixing
Source: company.

Figure 11. Share of pool by maturity, last five quarters

100.0%
0.2%		0.2%				0.3%				0.2%		0.2%
		0.2%		0.2%				0.1%				0.1%		0.1%
										0.1%
99.5%									0.1%					0.1%				0.1%
		0.1%											0.1%				0.1%
			0.1%				0.1%
		0.1%								0.2%		0.2%
			0.2%				0.2%
		0.2%
99.0%
1.2%		1.2%				1.3%				1.2%		1.3%
98.5%
98.0%
97.9%		98.0%			97.9%				98.0%		98.0%
97.5%
	Q2 2020		Q3 2020	Q4 2020		Q1 2021		Q2 2021
					10+ Y		5-10 Y			4-5 Y		3-4 Y		2-3 Y			1-2 Y		0-1 Y
Source: company.

Figure 13. Share of pool by priority claims, last five quarters

100.0%

99.5%
1.5%	1.5%	1.4%	1.4%	1.4%
99.0%
98.5%
	98.5%	98.6%	98.6%	98.6%
98.0%		98.5%
97.5%
	Q2 2020		Q3 2020	Q4 2020	Q1 2021	Q2 2021
Source: company.		No priority claims			Other priority claims

Figure 14. Region class and property type, 30 June 2021

(SEKbn)	60
50
notional	40				16
30
Outstanding
20				32	20	24
	10
			10	8
							3
	0
								0
				1	2	3	4	5
				Tenant-owned apartments		Single-family houses			Summer houses
	Source: company, NCR region definitions.

Figure 15. Region class, last five quarters

100%
2.9%			2.9%		2.9%	3.0%	3.1%
90%
27.3%			27.4%	27.9%	28.1%	28.4%
80%
70%
60%
26.9%			26.9%	26.8%	26.9%	26.8%
50%
40%
30%
42.5%			42.3%	41.8%	41.4%	41.1%
20%
10%
0%
	Q2 2020	Q3 2020	Q4 2020	Q1 2021		Q2 2021
				1			2			3		4		5
Source: company, NCR region definitions.

3/5

CREDIT RISK STRESS TEST

NCR's credit risk stress testing begins with standard assumptions as defined in our criteria. We then make adjustments to default assumptions based on the concentration of the portfolio and to stressed property valuations based on the region class of the specific property.

The resulting one-year and multi-year credit losses in the stress scenarios are compared with the expected loss of the portfolio using Danske Hypotek's own default probabilities, which improved in the second quarter, and contributed to reduced expected loss levels (Figure 16). In addition, increases in Swedish housing prices over the last few quarters have contributed to reduced expected losses, as well as a decline in NCR-stressed credit losses (Figure 17 and Figure 18).

The step-wise changes from the fourth quarter of 2020 in the figures below reflect the two changes. First, due to recent appreciation, Swedish housing prices are 5-15% above their long-term trend levels. In view of this, we stress the property collateral by 25-45% in the five scenarios compared with 20- 40% through the third quarter of 2020. Second, it reflects the fact that the stressed credit losses include a 7% upward adjustment to the standard default rates given that the company's cover pool is somewhat more concentrated than those of its Swedish peers. This is a decrease from 8% in our previous stress tests, reflecting a reduction in concentration in comparison with peer cover pools as loans have been added.

Figure 16. Expected loss as a share of cover pool loans, based on actual portfolio composition and NCR stress test, last five quarters

	12
	10
	8
bps	6
	4

2

0

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

20% fall

25% fall

30% fall

35% fall

40% fall

45% fall

Based on NCR analysis of company data.

Figure 17. One-year credit loss as a share of cover pool loans, based on actual portfolio composition and NCR stress test, last five quarters

120

100

bps

80

60

40

20

-

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

20% fall

25% fall

30% fall

35% fall

40% fall

45% fall

Based on NCR analysis of company data.

Figure 18. Multi-year credit loss as a share of cover pool loans, based on actual portfolio composition and NCR stress test, last five quarters

	450
	400
	350
	300
bps	250
200
	150
	100
	50

-

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

20% fall

25% fall

30% fall

35% fall

40% fall

45% fall

Based on NCR analysis of company data.

Figure 19. Peak non-performing loans as a share of cover pool loans, based on actual portfolio composition and NCR stress test, last five quarters

1,400

1,200

1,000

800

bps

600

400

200

-

Q2 2020		Q3 2020		Q4 2020		Q1 2021		Q2 2021
20% fall		25% fall		30% fall		35% fall		40% fall

Based on NCR analysis of company data.

4/5

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